There is a perception of widespread farm distress along with farmers' suicides and calls for loan waivers across states. But the business of crop insurance has shown strong growth. On the face of it, all is hunky-dory. Farmers are getting crop coverage even though they pay a hugely subsidised premium of less than 2 per cent of the sum assured. General insurance companies, especially big players like ICICI Lombard, HDFC Ergo and Bajaj Allianz, are underwriting it without any fuss. And the centre, as well as the state governments, are happily contributing the lion's share. The two-year-old scheme called Pradhan Mantri Fasal Bima Yojana (PMFBY) has promised all this and more, looking like a win-win for everyone.
For the records, PMFBY has replaced two earlier initiatives, the 18-year-old National Agricultural Insurance Scheme (NAIS) and the Modified National Agricultural Insurance Scheme (MNAIS). Both had lower sum assured and no participation from private insurers. Under the new policy, the National Democratic Alliance (NDA) government has already committed Rs13,240 crore for the current financial year, up from Rs5,500 crore in 2016/17. What's more, insurance companies are getting actuarial premium rates - a market-linked approach where they can fix their rates without any ceiling, taking into account costs, risks and margin to avoid losses. Last year, this new category helped general insurance companies post a 32 per cent growth at Rs1,26,000 crore. In a year's time, crop insurance has accounted for 18-20 per cent of their product portfolio, only next to auto and health covers.
In spite of these growth figures, crop insurance has always been a risky business all over the world. In 2012, US insurance companies suffered heavy losses due to a severe drought. Much like India, the US nurtures a subsidised crop insurance policy (but has been doing it for decades), and President Donald Trump has now proposed some massive cuts in that field. India is still taking baby steps, but there are issues that could have longer-term implications for insurance companies as well as the economy at large.
Rise of Subsidy Culture
The bigger idea of a market-linked policy is to move away from farm loan waivers or compensation for crop damages. It protects some food crops such as cereals, millets and pulses, besides annual commercial and horticultural crops. Both central and state governments share the premium subsidy equally (after farmers' contributions), and states can contribute more if they want. The scheme is optional for the states, but 24 of them, out of a total 29, have already joined the programme. The cost to the farmer is negligible, though, and those covered under the scheme paid only Rs3,807 crore as their premium contribution in the financial year 2016/17 while the central and the state governments bridged the gap by paying Rs16,200 crore.
The PMFBY covers yield losses due to natural calamities (drought, flood and so on), pest attacks, diseases and post-harvest losses. In the current financial year, the central and state governments have jointly contributed Rs22,600 crore as premium to provide crop protection worth Rs1,82,600 crore. In the case of 100 per cent claims on crop damages, when the entire liability of Rs1,82,600 crore will get invoked, the government will pay Rs80,000 crore, and the rest will have to be borne by the insurers. However, the government's liability is triggered after the losses cross 350 per cent of the premium amount.
In some states like Karnataka, insurance companies have already witnessed claims amounting to 300-350 per cent of the premiums paid, opening a floodgate for higher compensation for the insured and steep losses for the insurers.
There is another downside of the programme as it encourages a subsidy culture, making use of taxpayers' money. India is already struggling to reduce subsidies. In 2017/18, the country's subsidy bill for food, fertilisers and petroleum will be reaching around Rs2.4 lakh crore, nearly 10 per cent of the Union Budget of Rs21.46 lakh crore. Another subsidy is only going to contract the budget for capital expenditure.
Bounty for the Selected
Inadequate reach is another anomaly as the benefits of crop insurance remain cluster-based instead of targeting individual farmers. Every state is divided into several clusters, each covering four-five districts, and insurance companies bid for each of these clusters. However, only the state (or the political establishment) decides which cluster/crop is to be covered under the scheme.
Insurance is mandatory for loanee farmers, but the major flaw lies in that the policy does not encourage companies to cover non-loanees. "Convincing an individual farmer to buy crop insurance is not only difficult but also costly due of our lack of presence in rural areas," says an insurer requesting anonymity.
According to Tapan Singhel, Managing Director and Chief Executive of Bajaj Allianz General Insurance Company, more support aids may soon reach underserved communities. When a new market is created, the companies involved build infrastructure and create competencies, which should act as a solid foundation for servicing individual farmers, he points out.
The regulatory changes and the slowdown post-2008 have impacted the momentum of general insurers, with their premium growth stuck at an average 12-15 per cent for nearly a decade. Crop insurance has suddenly triggered an unprecedented growth because of the government's support and actuarial pricing. But here is the catch. A pricing war is already raging on the ground as companies are quoting less in the tenders to compete for each cluster across the states. Very soon, it may put them in a tight spot as "any bad pricing could increase a company's losses," says a consultant who does not wish to be named.
The bigger risk lies at the doorstep of the insurance companies. The government steps in only when the losses exceed 350 per cent of the premium in any year. "Globally, a government steps in after 100-150 per cent claims. We have set a very high barrier, and it only helps restrict the losses of the government," says the chief executive of a general insurance company.
Consequently, most of the general insurance firms are passing on the risk to big reinsurers such as the General Insurance Corporation of India (GIC) and Swiss Re, ceding more than 80 per cent. "We are not retaining more," confirms an insurer.
The fact that crop insurance players in India are ceding more than 80 per cent means general insurers are either not capable of handling the entire risk or do not have a quality crop insurance portfolio. It did not send out the right kind of signal, and many global reinsurers are keeping away from India. Some global companies are not comfortable reinsuring crop portfolios in Rajasthan, Gujarat and Karnataka. "They fear bigger claims in these states," says an insurance player.
As of now, GIC is probably taking a bigger risk as it is a part of the government's operations. "We are the national reinsurer. We have a moral obligation to the market. We have stepped in and picked up the mantle," says Alice Vaidyan, Chairperson and Managing Director of GIC.
GIC also cedes a part of the premium and de-risks its portfolio by taking further reinsurance from global majors. In 2016/17, it collected premium worth Rs9,744 crore, making it the biggest agri reinsurer in the world.
Reinsurers at home are aligning their strategy to work with the right companies that understand the risk. "We have to maintain proper pricing and also focus on risk mitigation. Otherwise, the capacity available to individual companies, and to the country, will get impacted," says Pushan Mahapatra, Chief Executive at SBI General Insurance Company. Experts predict that reinsurance rates will go up as some of the insurance companies have fared badly even in a good year like 2016/17.
The insurance companies say they are on a learning curve. "We are in the process of learning and building capacity. As we go along, we will retain higher premiums. The claim performance has to be seen in the 5-10 year period," says Singhel.
"The claim satisfaction will come over a period when we will see a cycle of good, bad and the worst years," notes K.K. Aggarwal, Executive Vice President of IFFCO-Tokio General Insurance.
The government is basking in the so-called success of the PMFBY. There are plans to increase the cropped area coverage from 30 per cent in March 2017 to 50 per cent by March 2019. The scheme could cover more crops in future. Clearly, the scheme has managed to bring down farmers' risks and protect the banks from loan defaults. But the risk ultimately rests with the insurers and the reinsurers. As the size and scale of crop insurance coverage improve, the bigger question is: Do Indian insurers have the financial muscle to underwrite higher crop insurance as a liability when a worst-case scenario could wipe out their net worth?